Following on from our special report on high-water marking in loans (1), it appears sponsors are now testing the US bond waters as well.

High water marking generally

As a refresher, high-water marking of EBITDA is a self-executing method of increasing the size of grower baskets (i.e., “the greater of $XX and YY% of EBITDA”), meaning that the borrower gets the benefit of increased EBITDA without suffering the detriment of falling EBITDA. The capacity of all baskets tied to EBITDA will remain elevated even after the underlying reason for the increase has disappeared.

Since January 2025, we have seen high-water marking appear in 32 offering memorandums. Of these, 29 were European deals and three were US deals. Other than two European deals, all the remaining transactions were sponsor deals. Note we only received final offering memorandums for six of these deals, and we have not seen a final indenture for any of these deals to confirm if the high-water marking provision made it through.

Of the 32 agreements:

• Apollo and TDR Capital were the most prolific sponsors, with each appearing in four such OMs; and

• KKR, Lone Star and Investindustrial were in second place, with each appearing in two such OMs.

Testing the US market

As seen in the numbers above, high-water marking is rare in the US bond market. When it is included, it takes the typical formulation and is usually included in the interpretive section of the credit agreement.

Recently, in a USD/EUR bond issuance by BASF Coatings with Carlyle as the sponsor, high-water marking was instead included by way of a definition for

“EBITDA Grower Amount”: “EBITDA Grower Amount” means, at Intermediate Holdings option, an amount equal to: (a) the Consolidated EBITDA of Intermediate Holdings calculated on a Pro Forma Basis for either (i) the most recently ended Test Period, or (ii) the most recently ended TTM Period; or, (b) any other (i) previously ended period of four consecutive fiscal quarters of Intermediate Holdings (taken as one accounting period) in respect of which financial statements for each such quarter or fiscal year in such period have been delivered to the Trustee, or (ii) TTM Period.

The effect of this definition is that, at the option of the Issuer, capacity for baskets with EBITDA grower amounts can be calculated by reference to any past period for which financials have been delivered, not just the most recent period.

This means that capacity for any basket with a grower component can potentially be increased by calculating the EBITDA Grower Amount by reference to a previous period with higher EBITDA, regardless of EBITDA for the most recent period.

Whilst we have not received a final indenture for this issuance to confirm if this made it through, this is a timely reminder that bonds are not immune from these attempts by sponsors and linked definitions should always be reviewed closely. Lenders should continue to push back against attempts to include high-water marking in deal documents, and the earlier this can happen in the documentation stage, the better.

1 See our Special Report on the topic here (access required).